Dividend stocks have historically been excellent investments. Over the last 50 years, dividend-paying stocks in the S&P 500 have outperformed that broad market index. They have produced a 9.2% average annual total return compared to 7.7% for an equal-weighted S&P 500 index fund, according to data from Ned Davis Research and Hartford Funds. The best performances have come from companies that routinely increase their payouts: Such companies have averaged a 10.2% annualized return, versus 6.6% for those with no changes in their dividend policies.
Enbridge (ENB -0.42%) stands out among dividend payers for its consistent ability and willingness to increase its payouts. The Canadian energy infrastructure giant has delivered 28 straight years of dividend growth, and it has plenty of fuel to keep that streak going. That makes it a no-brainer buy for those seeking income and upside potential.
Built to endure
CEO Greg Ebel highlighted the company's value proposition on Enbridge's recent third-quarter conference call:
Our business is stable, and we remain committed to delivering predictable cash flows. The balance sheet is strong and remains a key priority. We have a long track record of sustainably returning capital to shareholders and will continue to grow our dividend.
Enbridge has one of the lowest-risk business models in the energy sector. Its pipeline and utility businesses generate very predictable cash flows:
Image source: Enbridge.
As that slide shows, 98% of its earnings before interest, taxes, depreciation, and amortization (EBITDA) come from cost of service agreements or long-term contracts. Those features shield it from commodity price volatility and market dislocations. That enables it to produce predictable and steady cash flows. It's in the process of enhancing its already stable earnings profile by acquiring three natural gas utilities from Dominion Energy.
Enbridge also has a strong investment-grade balance sheet. Its leverage ratio is currently at the low end of its target range of 4.5 to 5. That gives it lots of financial flexibility to capitalize on investment opportunities like its gas utilities deal with Dominion.
Enbridge's stable cash flows and strong balance sheet allow it to return excess cash to shareholders through an attractive and growing dividend. At its current share price, the energy infrastructure giant's payout offers a 7.6% yield.
More growth ahead
Ebel continued his commentary on the company's value proposition by highlighting what's ahead:
We have visibility to our near-term and medium-term growth outlooks with conventional and lower carbon opportunities embedded throughout the business. All of our project announcements during, and subsequent to, the quarter are individually and collectively aligned with that value proposition. Each will generate an attractive risk-adjusted return that is regulated or backed by long-term offtake agreements. Looking forward, our 5% EBITDA medium-term growth outlook that we set at Investor Day is significantly de-risked, and today's announcements enhance Enbridge's lower carbon footprint across multiple business units while increasing DCF per share.
The company entered this year with lots of visible growth on the horizon, mainly thanks to its extensive backlog of capital projects. It has significantly enhanced its growth profile this year. The Dominion utility deal is the biggest driver. The $14 billion transaction will be immediately accretive to its earnings after it closes next year. It also enhanced Enbridge's growth profile by adding billions of dollars in low-risk, high-return capital projects over the next three years.
On top of that, the company has made several smaller bolt-on acquisitions, including a gas storage business, a renewable natural gas platform, and an increased stake in some offshore European wind farms. Enbridge has also further enhanced its capital project backlog by securing high-return projects including new natural gas pipelines and other lower-carbon investments.
The fuel to continue producing attractive total returns
Ebel concluded by saying the company's "value drivers have underpinned 20 years of dividend growth and average annual shareholder returns of approximately 11%, and we expect this to continue."
Enbridge's rock-solid 7.6%-yielding dividend will provide investors with a nice base cash return. Meanwhile, its expected 5% annual earnings growth rate will enable it to continue increasing its dividend and enhance its total return, potentially pushing it into the double-digit percentages. That ability to produce a high total return from such a low-risk business model makes Enbridge a no-brainer investment for the long haul.
Matthew DiLallo has positions in Enbridge. The Motley Fool has positions in and recommends Enbridge. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
